We love ironies. They help sharpen our awareness of issues that are otherwise obscured.
Last week, Nebraska's Governor Dave Heineman gave the green light for Keystone XL to cross through the "Cornhusker" state. Passing a big oil pipeline through the cornfields of Nebraska – the third-largest in the U.S. – is like having an unsuspecting challenger sneak by its principal antagonist in the fight to fill American gasoline tanks. The irony of the situation highlights the battle between renewable energy and fossil fuels.
Figure 1 (to the left) shows the rapid growth of ethanol in U.S. transportation. In the decade between 2001 and 2011, the supply of the dominantly corn-fed biofuel rose from 70,000 to 500,000 barrels of oil equivalent per day (BOE/d). Ethanol is blended with gasoline, in effect diluting the need for the latter. So while the direct point of competition is in the gas tank, the battle for market share is further upstream: the oil well versus the cornfield.
The sevenfold growth in ethanol consumption has led to the theft of 5 per cent of gasoline's market share (see Figure 2). Exponentially rising oil prices facilitated the agro-assault by: 1) making gasoline expensive and allowing the lurking competitor into the market; and 2) causing citizens and politicians to scream for alternatives at a time when energy security was a real fear. It was this latter factor that triggered government policies that guaranteed corn growers a share of the lucrative transportation fuel market.
Notable credits and tariffs for the biofuel business have been around since the Carter administration; however it was during the presidency of George W. Bush that policy accelerants were implemented. Research funding, production incentives, and mandatory blending percentage mandates were stacked into three key legislative packages: The Energy Policy Act of 2005; the Energy Independence and Security Act of 2007; and the Food Conservation and Energy Act of 2008. Again, the urgency of these programs was amplified by the rising price of oil juxtaposed against the uncomfortable U.S. dependency on foreign imports.
On an energy equivalent basis, the 5-per-cent grab by ethanol during the 2000s was one of the biggest wins in the market-share battle between renewables and fossil fuels. The result has been dramatic on price – for both commodities.
High oil prices over the past decade have backlashed into big price discounts in now-oversupplied North American markets. Factors leading to the price reversal include fuel substitution, declining consumption, and offshoring of energy-intense manufacturing. Growing light oil production has been a headliner over the past year; the corn-for-oil fuel substitution has been a more subtle, but notable factor in backing up oil pipes.
Meanwhile, the extra demand for corn has led to a predictable price run: 250 per cent between 2005 and now. More recently, drought in the U.S. corn belt has crimped supply and pushed the price of a cob up even higher. Because of the domestic shortfall, fulfilling mandatory blending requirements now entails importing ethanol, pitting a stalk of Brazilian sugarcane against a barrel of North American oil.
Figures 1 and 2 both show a levelling out of the agro-assault on oil since early 2011. Today's high corn prices and lower domestic oil prices mean that the only thing holding up ethanol's market share in transportation fuel is entrenched legislation. Conversely, it also means that the offensive is over for the moment; at current prices oil is unlikely to cede any more of its share to corn.
Yes, it's ironic that Big Oil may be passing underneath the doorstep of Big Corn to compete in the lucrative transportation fuel market. Yet the real irony is that both competitors are chasing after the allure of high price, not realizing that it is low price that wins the battle for market share.
Peter Tertzakian